By Sergio Lima.
Brazil’s real estate bubble is the center of conversations in bars, restaurants, and barber shops. There is no way out.
Despite the fact that many informed Brazilians are aware about the issue, the overwhelming majority of the population isn’t. And this occurs not only because of their ignorance, but also because of the mass misinformation that is constantly broadcasted by the media. Brazilian “experts” like economist Ricardo Amorim (nicknamed “Cement Index Guy”) or the high-profiled Luis Carlos Mendonça de Barros (“Mendonção,” a protagonist of the Telecom privatization scandal), swear by their mothers that there is no housing bubble and will never exist in our country. And these two are merely exemplary. Brazil’s entire media is “campaigning” against a housing bubble, obviously. No news there.
But what is a real estate bubble? The “herd” says that it’s when the total housing credit to individuals achieves very high rates relative to the GDP of a country. Hence, they say, there is no bubble because Brazil’s mortgage/GDP ratio is only 5%. But this concept is a fallacy – it helps the “herd” to justify the high prices.
The real definition of a bubble is when property prices rise faster than (and decouple from) wage income growth, fueled by governments and bankers pushing and motivating this same population to continue buying. And the bureaucrats do that by either lowering interest rates or increasing financing terms (just compare the current 35-year terms against the standard 15-year in 2004). Just look at how our property prices doubled or tripled in a 4 or 5 years and you’ll have an idea of what a bubble really means.
Below I transcribe some numbers that explain the formation of the Brazilian bubble. Those who oppose this data, please do yourself a favor and destroy the Central Bank’s database. The data below represents the amount financed (by private and public Brazilian banks) for all housing units.
MM/YY / Total Units / Total Loans / Average unit value
June/12 – 408,522 – R$ 69,780,000,000.00 – R$ 170,810.00
June/11 – 452,761 – R$ 66,320,000,000.00 – R$ 146,484.00
June/10 – 353,313 – R$ 43,380,000,000.00 – R$ 119,939.00
June/09 – 289,351 – R$ 29,830,000,000.00 – R$ 103,092.00
June/08 – 240,418 – R$ 23,397,000,000.00 – R$ 97,322.00
June/07 – 140,820 – R$ 11,770,000,000.00 – R$ 83,588.00
June/06 – 85,212 – R$ 6,680,000,000.00 – R$ 78,392.00
June/05 – 50,760 – R$ 3,637,000,000.00 – R$ 71,650.00
June/04 – 48,434 – R$ 2,615,000,000.00 – R$ 53,990.00
June/03 – 31,220 – R$ 1,792,000,000.00 – R$ 57,399.00
June/02 – 29,897 – R$ 1.731.000,000,00 – R$ 57,898.00
June/01 – 38,977 – R$ 1,955,000,000.00 – R$ 50,157.00
Since 2009, both the total lending and the average unit value became “contaminated” by the insertion of the properties that are part of the low-income program “Minha Casa Minha Vida” (MCMV). In 2008, the average unit value was R$ 97,322, and it did not include the MCMV homes. From 2009 until March 2010, with the funding of 160,000 low-income houses (with values not exceeding R$60,000.00) that were part of the MCMV project, one can infer that the non-MCMV homes funded in Brazil between July 2009 and June 2010 were financed based on super high-valuations (in order to get the average unit price higher than the previous year).
A brief history of the bubble:
In 2004, our great populist, statesman Lula set his bubble building plan by making public banks like Caixa to increase its property financing term from 180 to 240 months, in addition to leveraging the FGTS accounts to lend more:
Then in 2006, the uber-populist passed Law 11,382 allowing banks to repossess properties from defaulters after only 3 months of late payments:
Between 2005 and 2007, as you all know, there was a flurry of IPOs of Brazilian real estate companies, which used their cash to over-leverage their balance sheets and purchase lands like there is no tomorrow:
In 2007, Lula’s Caixa, again, increases its home financing terms from 240 to 360 months:
Between 2007 and 2008, bubble all over the world burst and the Brazilian builders ask for government protection. Obviously, the government says yes through a temporary measure MPV443) which became a law (no. 11,908):
In 2009, at the request of builders, mainly Rubens Menin (MRV’s President), the government creates the MCMV (“Minha Casa Minha Vida”), nicknamed by many “Minha Casa Minha Divida (“My House, My Debt”).
And now, in 2012, our lovely president Dilma increases again the home financing terms from the already alarming (for Brazilian standards) 360 to 420 months! In other words, while criminals in Brazil are favored by loose laws to reduce jail times, the over-indebted borrowers see their purchasing “freedom” being vanished by mortgage payment terms that are longer than any one serious criminal can serve in Brazilian jails.
But one important fact gives me a very strong indication that the bubble has already burst last March: mortgage defaulters (SFH/BC).
Over 90 days / Up to 90 days
Jun/11 – 59,139 / 97,368
Jan/12 – 53,977 / 102,935
Jun/12 – 52,765 / 184,402
The number of “over 90 days” defaulters seem relatively stable, but notice how the “up to 90 days” jumped from 102k to 184k in just 6 months.
As this figure refers to delays of up to 90 days and the data is for the month of June 2012, I believe the market began to cripple in March 2012.
Source: Bolha Imobiliaria